5 Tips for Understanding Traditional Mortgages

Are you looking to buy a home in the near future? If so, it’s important to understand the types of mortgages available to most homebuyers.

One type of mortgage that often comes up is a traditional mortgage. This type of mortgage is the gold standard for many Americans, but not everyone qualifies for a traditional mortgage.

This article discusses the key components of traditional mortgages and five tips for understanding the traditional mortgage loan process to prepare you to buy a home this year.

What is a Traditional Mortgage?

A traditional mortgage is a Conventional loan with a 30-year term and fixed interest rate. These loans make up roughly 53 percent of mortgage volume in the US and are not insured or guaranteed by the federal government.

On the other hand, non-traditional mortgages are all other mortgages aside from a 30-year fixed rate mortgage.

Here are some of the key characteristics of a traditional mortgage:

Down Payment

Borrowers are typically required to make a down payment of at least 3% to 25% at closing. The exact percentage depends on the lender's requirements and the borrower's financial situation.

Loan Terms

Traditional mortgages typically come with fixed rates and repayment terms of 30 years.

Fixed-rate mortgages maintain the same interest rate throughout the life of the loan, while adjustable-rate mortgages (ARMs) have interest rates that may change periodically, usually after an initial fixed-rate period.

Private Mortgage Insurance (PMI)

When a borrower makes a down payment of less than 20%, lenders often require them to pay for private mortgage insurance. PMI protects the lender in case the borrower defaults on the loan.

Credit Requirements

Lenders have specific credit score and financial requirements for borrowers seeking a traditional mortgage. Generally, a higher credit score and good credit history increase the likelihood of qualifying for more favorable loan terms.

» MORE: The Role of Credit Scores in Mortgages

Loan Limits

Traditional mortgages are subject to loan limits set by government-sponsored entities like Fannie Mae and Freddie Mac. These limits vary by location and are designed to ensure that the majority of mortgage loans are accessible to a broad range of borrowers.

Property Appraisal

Before approving a traditional mortgage, the lender typically requires a professional appraisal of the property to determine its value.

The Bottom Line

Traditional mortgages are popular among borrowers who have good credit scores, stable income, and the ability to make a significant down payment. 

Compared to government-backed loans, they often offer more flexibility in terms of loan amount and property types, making them suitable for a wide range of homebuyers. 

However, because they lack government backing, the eligibility requirements may be more stringent, and interest rates can vary based on market conditions and the borrower's financial profile.

Tips for Understanding Traditional Mortgages

Understanding traditional mortgages can be essential for making informed decisions when buying a home. Here are five tips to help you grasp the fundamentals:

Research Mortgage Basics

Start by learning the basic terminology and concepts related to mortgages. Learn to understand terms like down payment, interest rates, loan term, principal, private mortgage insurance (PMI), closing costs, and points. 

This foundational knowledge will make it easier to navigate discussions with lenders and real estate professionals.

Compare Lenders and Loan Options

Don't settle for the first mortgage offer you receive. Borrowers should shop around and compare mortgage products from multiple lenders. 

Be sure to look out for variations in interest rates, loan terms, and associated fees. It’s also a good idea to consider both fixed-rate and adjustable-rate mortgages to understand which one aligns better with your financial goals and risk tolerance.

» MORE: The Pros and Cons of Adjustable Rate Mortgages (ARMs)

Calculate Affordability

Before committing to a mortgage, assess your financial situation thoroughly. Calculate how much house you can afford by factoring in your monthly income, expenses, and other financial obligations. 

One of the best ways to assess affordability is to use online mortgage calculators to estimate monthly payments and determine what down payment you can realistically make.

Understand Preapproval and Prequalification

Getting preapproved or prequalified for a mortgage is an essential step in the homebuying process. Prequalification is a less-intensive process where a lender provides an estimate on your borrowing power without a formal credit check. 

On the other hand, preapproval is a more in-depth process where the lender verifies your financial information and offers a conditional commitment to lend a specific amount. Understanding the difference between the two can help you prepare for the home search more effectively.

» MORE: The Role of Lenders in the Preapproval Process

Review Loan Documents Carefully

Once you've selected a lender and mortgage product, carefully review all loan documents before signing. Pay close attention to the interest rate, loan term, closing costs, and any prepayment penalties. 

Ask your lender to explain any terms or conditions that you find unclear. Taking the time to understand the loan documents will help you avoid surprises and ensure that you are getting the mortgage that suits your needs.

Final Thoughts

Remember that buying a home is a significant financial decision, and understanding the intricacies of traditional mortgages can help you secure a loan that aligns with your financial situation and long-term goals. 

If needed, don't hesitate to seek advice from a qualified financial advisor or a reputable mortgage professional who can guide you through the process.

» MORE: 8 Tips When Saving for a Down Payment